Role discrepancies and the auditor-client relationship

Accounting,

Organizations and Society, Vol. 2, No. 1, pp. 81-91.

Pergamon Press, 1977. Printed in Great Britain.

ROLE DISCREPANCIES AND THE AUDITOR-CLIENT KIRKLAND

RELATIONSHIP

A. WILCOX

University of Colorado

and CHARLES H. SMITH University of Illinois

Role dissatisfaction (resulting from a discrepancy between perceived and expected roles) has long been known as a source of conflict in many different behavioral situations. Except for the research by Churchill & Cooper (1965) concerning role dissatisfaction in the internal auditors, auditor-client relationship (an obvious behavioral relationship) has not been studied. The Churchill and Cooper study focused on intraorganizational relationships. Role dissatisfaction as a source of conflict between the independent external auditor (Certified Public Accountant or CPA) and his client (including client employees), an interorganizational relationship, has not been given attention. While role dissatisfaction is not the only source of conflict, Walton & Dutton (1969) clearly recognized role dissatisfaction as a source of conflict in their studies of interdepartmental (an interorganizational situation) conflict.’ In his studies of conflict between members of a distribution channel (an interorganizational situation) Stern (1969, p. 21) noted: Role is a central concept in social system theory, for roles are prescriptions which define the behavior of system members. Discrepancies between perceived roles and role expectations among . . members can result in conflict .

Perceived roles are the roles a system member believes he is performing. The expected role is the function the other members of the system think he should perform. Stern & Heskett (1969, p. 294) “when roles are unclear or not state that

performed as expected, conflict is inevitable”. Substantial interaction takes place during the course of an audit between an auditor and the client’s personnel. Conflict, broadly defined as antagonistic interaction (Fink, 1968, p. 456), does not have to lead to a distintegration of the auditor-client relationship for it to be harmful. It needs to be “managed” (prevented, reduced or eliminated) even if it interrupts efficient and effective conduct of the audit. However, a decision to “manage” need only be made if the role discrepancies exist, and if they represent a problem in the auditor-client relationship. This paper reports the results of a study that included a search of the professional accounting literature in order to assess the profession’s views of the Certified Public Accountant’s (CPA) role in an audit engagement and a survey of the employees of several audit clients to (1) determine whether there are discrepancies between the CPA’s role as perceived by the CPA and as expected by client personnel, (2) determine whether such discrepancies lead to conflict in the auditor-client relationship, and (3) identify relationships that might be viewed as indicators of conflict resulting from role discrepancies.

THE PROFESSION’S VIEW OF THE CPA’S ROLE There can be no question about the fact that the CPA views himself as a professional in the

‘Walton & Dutton (1969, pp. 75-76) identify other sources of conflict such as mutual dependence, asymmetries, performance criteria and rewards, organizational differentiation, ambiguities, common resources, communication obstacles, and personal skills and traits. Several of these other sources of conflict will be the subject of future research to be conducted by the authors. 81

82

KIRKLAND A. WILCOX and CHARLES H. SMITH

same sense that a lawyer and a doctor are viewed as professionals. Furthermore, it appears that the universal opinion within the accounting profession as to the CPA’s primary function is that of rendering an independent opinion concerning the fairness of the financial reports of his clients. This idea is set forth in most discussions of the CPA’s function, for example, see The American Institute of Certified Public Accountants (1967, p. 36) Willingham & Carmichael (1971, p. 4) and Bevis (1962, p. 30). Without a doubt, the primary function of a CPA is the expression of his opinion concerning the financial statements of his clients. However, it is readily apparent that CPA’s are performing, and are expected to perform, a number of other services for their clients. In A Description of the Professional Practice of Certified Public Accounts (AICPA, 1967, p. 36) in addition to identification of the “expression of an opinion” function, attention is drawn to services such as the rendering of opinions on a wide variety of other representations such as compliance with rules and regulations of governmental agencies, etc.; the advising of clients of needed improvements in internal control; and other financial, tax and operating matters. Also included are advice and consultations on various management problems, assistance in the development and implementation of various programs desired by management, tax planning and advice, preparation of tax returns and representation of clients before governmental agencies. This broad range of services included in the definition of a CPA’s role coincides with the conclusions drawn by the Committee on Scope and Structure. Their conclusions were “. . . that the profession, as it has in the past, must be willing in the future to maintain a broad and expanding range of services which are responsive to the needs of society” (AICPA, 1975, p. 8). While the major relationship examined in this study is that surrounding the primary function of “expression of his opinion on clients’ financial statements,” Question 2 is aimed at determining the extent of the subject’s knowledge concerning the many other functions described above. This was done in order to ascertain whether client’s employees have an accurate perception of the CPA’s complete role. One special phenomenon which exists in the auditor client relationship that does not generally exist between other professionals and their clients, is the fact that the CPA’s services are generally of primary importance to parties outside the

auditor-client system, (i.e. stockholders, creditors, governmental agencies, etc.) rather than to the personnel within the client firm. Likewise, his responsibilities are generally considered to be to these (third) parties. The AICPA stated in the “description” noted above that “CPAs have a distinctive role in examining financial statements submitted to investors, creditors and other interested parties . . .” (1967. P. 36). Bevis noted that “His [the CPA’s] position as independent auditor, which involves a peculiar responsibility to third parties, is not assumed by those in private employment” (1962, p. 29). Since the study is mainly concerned with the auditor’s primary function of “expressing his opinion” on financial statements, it was deemed necessary to take a more specific look at the nature of this function. What is involved in the “expression of an opinion” on the financial data and what is the auditor’s responsibility? The financial statements are the representations and responsibility of management, and the auditor’s responsibility is confined to the expression of his opinion on them. This is the position of the AICPA (1973, pp. l-2). The liability or responsibility to third parties is generally conceived to be related to fraud or defalcations (Hill, 1965, p. 239). The AICPA (1973, pp. 2-3) says, however: . . the ordinary examination . . . is not specifically designed, and cannot be relied upon, to disclose defalcations and other similar irregularities, although their discovery may result. Similarly, although the discovery of deliberate misrepresentation by management is usually more closely associated with the objective of the ordinary examination, such examination cannot be relied upon to assure its discovery. He (the independent auditor) is not an insurer or guarantor; if his examination was made with due professional skill and care in accordance with generally accepted auditing standards, he has fulfilled all of the obligations implicit in his undertaking (AICPA, 1973, p. 41. In some cases, this liability to third parties has been eliminated by the courts even if negligence was apparent. In a landmark case (Ultramares vs Touche), the court expressed the view that “even if negligence existed, it did not create liability to the plaintiff in the circumstances of this case” (Levy, 1954, p. 31). The court went on to say, however, that if the negligence permitted a fraud to be perpetrated, then the auditor could be held liable by the third party (Hill, 1965, pp. 239- 240).

ROLE DISCREPANCIES

How then does the typical auditor perceive his role on an audit? The auditor does nor generally see himself as society’s “watchdog” or “policeman”. This is apparent from the position expressed by most CPAs and the accounting profession in the USA that the detection of fraud is not a primary responsibility of the auditor as noted above. A study sponsored by Arthur Andersen & Co. (1974, pp. 48-50, 59) indicates that this idea is supported quite strongly by accountants and accounting professors. The auditor apparently sees a need for reliable information in our private enterprise and equity market oriented economy, and sees his expression of an opinion on the client’s financial statements as adding credibility to such information. Obviously, the extent of this credibility is limited. The auditor cannot possibly examine every transaction entered into by his client. He must be guided by his perceptions of “materiality” and “fairness”. He may provide many of the other services listed earlier for his clients, but his primary function is the examination of financial statements.

METHODOLOGY The questionnaire As a result of the examination of the literature, a decision was made to give attention to the auditor’s function (see Question 2 of the questionnaire), the standing of public accounting as a profession (3), the respondent’s evaluation of the audit function (4) the respondent’s perception of his colleagues’ attitudes concerning the audit (5) the respondent’s opinions as to the recipient of the audit’s benefits (6), auditor’s responsibility (7), and the auditor’s image (8).

83

These seven questions together with another (Question 1) directed at determining the respondents’ opinion as to the existence (or use) of conflict in his or his company’s relationship with one part of the the auditor, made up questionnaire. A second part (not reproduced in the Appendix) contained a number of questions relating to the respondents’ background. As can be seen from the questionnaire in the Appendix, three scaling techniques were used. Some of the questions were in the form of statements requiring an indication of agreement or disagreement on a Likert (strongly agree-strongly disagree) scale. A second group of questions sought to measure attributes concerning certain concepts on semantic differential scales.2 The third group required respondents to rank certain items.3 Selection of respondents

The questionnaire was administered to all the employees who had contact with the auditor during an audit in six different business firms in a major metropolitan area in the USA. Employees of the auditor’s client were selected because it has been noted that these personnel who have contact with the opposite organization-boundary personnel-are the ones primarily responsible for setting the mood for interorganizational relations (see Evan, 1969, p. 74). The companies selected range from small, local businesses to two which are listed in Fortune’s 500. They represent the petroleum, construction, printing, and manufacturing industries. An analysis of the response results by company and by types of employees surveyed is presented in Table 1. The questionnaire was handed directly to each subject on the client’s premises, and the objective of the research was explained. Respondents were

*One of the problems in using the semantic differential technique is the selection of scales. Osgood’s studies indicate that the polar adjectives utilized usually measure three factors about a concept, an evaluation, its potency, and its activity (Osgood et al., 1971, pp. 35 -76). In selecting adjectives for the measurement of attitudes and opinions, Osgood et aZ., recommend primarily the use of adjectives that make evaluations (1971, pp. 189-191). Based upon these recommendations, evaluativeadjectives were selected. ‘The analysis of the response results in this study is based primarily on nonparametric statistical procedures for testing significance and determining relationships. The only exception is the use of means to show the relative importance of two or more variables or the relative importance of a variable to two or more groups. The tests utilized in this study are: the Kruskal-Wallis one-way analysis of variance (H test); the Kendall r correlation coefficient; the Kendall coefficient of concordance sets of ranked items.

(W) to determine the degree of association between three or more

A discussion of these techniques may be found in Siegel (1956) and Nie, Bent & Hull (1970).

84

KIRKLAND A. WILCOX and CHARLES H. SMITH TABLE 1. Response results By company:

A B C D E F

Size

Tvve

Number issued

Number returned

Return rate

Large Large Medium Medium Small Small

Petroleum Manufacturing Manufacturing Manufacturing Printing Construction

167 30 19 16 14 13

137 22 8 6 11 2

82.0% 73.3% 42.1% 37.5% 78.6% 15.4%

259

-186*

-71.8%

Total Number of responses by: Title: Clerk Junior Accountant Unit Supervisor Department Manager Internal Auditor Analyst/Programmer Controller Officer Other

Function: 9

34 66 36 5 9 2 11 7

Accounting Payroll/Budgeting Purchasing/Marketing Auditing EDP Management Other

113 11 9 8 8 13 11 173*

.179*

*Fifteen of the 186 questionnaires were incomplete in certain respects and were omitted from the analysis included herein when necessary.

not asked to sign the survey instrument which was returned to the researchers via mail in a self-addressed, stamped envelope.

FACTORIAL COMPOSITION OF SEMANTIC DIFFERENTIAL ADJECTIVES4 The semantic differential adjectives were analyzed using D.J. Veldman’s EDSTAT V FACTOR program. The values used as factor loadings were the principal axis or unrotated loadings.’ The scales under each question (concept) were analyzed as a group. In all cases all factors possible were extracted. Table 2 presents the data derived from the factor analysis and the orientation of those scales taken from various studies presented by Osgood et al. All of the scales on Question 4 except desirable- undesirable and justified-unjustified

were found in Osgood et al., and all were shown as evaluative scales. In analyzing the factorial results of the scales, it will be noted that in several cases, a group of scales that Osgood considered evaluative, do not all load on the same factor. From Table 2 it can be seen that the pleasant-unpleasant scale is not as highly correlated with Factor I as with Factor II, while all the other scales are highly loaded on Factor I. Osgood et al., (1971, pp. 70 -71) have noted this situation. He indicates that the evaluative dimension is a very general one, and that analyses of purely evaluative scales have revealed subfactors or more detailed factors which have been evaluative”, “morally “aesthetically called evaluative”, “socially evaluative” etc. With this in mind, the analysis of Question 4, which is the respondent’s perception of the audit function reveals two evaluative factors-the first with the valuable- worthless, beneficial- harmful, scales

4Based upon earlier discussions, the semantic differential adjectives selected for this study were primarily those that are evaluative. Since the factorial composition was not known for some of the adjectives selected, the adjectives were factor analyzed using the survey data. This approach is recommended by Osgood et al. (1971, p. 79). ‘This approach corresponds to the technique used in the Solomon Study presented by Osgood et al.(1971,

pp. 66_ 68).

ROLE DISCREPANCIES TABLE

2. Results

of factor

analysis

85

of semantic

differential

scales* Communality (h’) All factors

Factors?

Variable I

IV

v

VI

Valuable-worthless’!

.85

-.26

.32

.02

.13

.17

Beneficial-harmfult

G-

-.24

.22

.02

.oo

.09

Useful-uselesst

.89

-.ll

.07

.16

-.07

Desirable-undesirable

-.26

.I1

-.41

Justified-unjustified

85 : .82

-.03

-.43

.12

.35

.03

Pleasant-unpleasantt

.49

&

.16

.04

.04

Question

4 -Respondents’

perception

of audit

Good-badt

Question

&

Percent

total variance

Percent

common

5 -Company’s

variance-major factors

perception

of audit

Pleasant-unpleasantt

83.9

16.1

I

II

Excessive-inadequate

.17

Desirable-undesirable

; 88

Necessary-unnecessary

.84 : 74

Percent

total variance

Percent

common

variance-major factors

.18 12.5

-62

Valid-invalid

.oo

65.5

.87

Useful-uselesst

III

II

.17 -.05

-.57

6.3

5.7

-.39 .15

.OO -.06 4.5

3.1

Major factors 8

VII 100

.79

100

.84

.05

100

.81

.05

100

.73

-.02

100

.68

-.02

100

.94

100

.67

.24 -.32

.Ol 2.4

78.0

100

100.0

III .lO

-.Ol

.74

.06

IV

V

VI

.26

-.40

-.03

100

.77

.lO

.ll

100

.95

-.18

-.os

.17

.08

-.03

100

.96

-.21

-.04

.ll

.23

-.33

100

.83

-.16

-.32

.97

.17

53.7

17.3

12.9

64.0

20.6

15.4

100

.84

-.55

-.09

-.Ol

100

.69

8.0

4.4

3.7

100

.20

-.32

.17

.31

83.9 100.0

* A discussion helpful Rummel (1967).

in understanding

the data presented

t Shown by Osgood ef al. (1971) to be evaluative Solomon Study-Table 6”, (p. 67)). f Largest

factor

D Factors

with at least one major

loadings

can be found

(see “Analysis

in a description of factor analysis by R.J.

III: Thesaurus

Sampling

- Table 5”,(pp.

53- 61) and

are underscored. factor

loading

(I and II for Question

useful-useless, desirable-undesirable. justifiedunjustified, good- bad, and the second with pleasant-unpleasant. The set of scales loading on Factor I seem to suggest a value judgment as to the worth of the audit function, while Factor II seems to measure the respondent’s aesthetic value or personal likes and dislikes of the audit function. Factor I then might be called “evaluative-worth” while Factor II could be called “evaluativeaesthetic”. The scales of Question 5 reveal three major factors. As with 4, Factor I indicates a value judgment of the audit while Factor III, with the

4; I, II and III for Question

5).

pleasant-unpleasant scale, indicates the aesthetic valuation. Factor II, with the excessive-inadequate scale would be an adequacy measurement.

RESULTS AND DISCUSSION Existence of Discrepancy in Role Perceptions How does the client view the auditor and his role? Some managements view the auditor as an assistant. Any time they have an accounting problem they call the auditor for advice. The relationship in this auditor-client system is usually

86

KIRKLAND A. WILCOX and CHARLES H. SMITH

in the friendly category. On the other end of the scale, however, is the client employee who sees the auditor as a policeman sent by upper management and/or owners to “check-up” on him. He feels that his honesty is being questioned or that the auditor may find errors which could threaten his position. This view was indicated in the Churchill-Cooper (1965, p. 775) study cited earlier. In their study,, 57% of the respondents answered “none” and 40% responded with “little” to a question concerning the extent to which internal auditors are seen as useful consultants while 58% stated that the internal auditor was “most like a policeman”. It is quite possible that the policeman view might be even more strongly held in relation to an independent auditor. He is an “outsider” to the organization, whereas the internal auditor is an employee of the same organization as the people he “checks”. It is sufficient to suggest at this stage that any difference between perceived roles (by the auditor) and expected roles (by the client) could lead to some degree of hostility on the part of the employees. Walton & Dutton (1969, p. 76), note this possibility in their statement that when “one unit informally reports on the activity of another unit, resentment can occur, as with staff reporting to management on production irreguThis is similar to the auditor-client larities”. situation in which the auditor can and does in most cases discuss with upper management, major

errors discovered during the examination. In addition, auditors often make a report to upper management concerning the extent to which company policies and procedures are being followed, and, in some instances, on the quality of the personnel. Auditors also make reports to etc. concerning stockholders, creditors, the effectiveness of management, and, through the financial statements and their opinions, report on the enterprise to society. The first objective of this study is to determine whether there is a discrepancy between the CPA’s role as he perceives it, and as client personnel perceive it. Table 3 presents the means of all respondents on the scales designed to investigate the respondents’ views concerning the roles of the auditor and the audit function. A comparison can be made between these responses and the public accounting profession’s perception as to the CPA’s role as discussed earlier. Question 2 asked the respondent to agree or disagree with a variety of possible functions. The lower the mean, the stronger is the agreement with the item. A review of the mean responses for the functions listed in 2 indicates general agreement with the AICPA’s views of the CPA’s function (see the discussion above). The function with the lowest mean (strongest agreement) is to “insure that the company is accurate in its financial reporting” with “accuracy in its tax reporting”

TABLE 3. Views concerning the role of the auditor - all responses

Ouestion

Number of observations

Type of questiont

3.56 3.98

186 186

L

3.06 4.54 3.31

186 186 186

5.31 4.58 5.03 5.04

186 186 186 186

3.05 3.48

186 186

1.99 2.41 4.55

186 186 186

2.11

186

Meanf

Auditor’s function is to:

2. :: C. (1)

(2) (3) d:

(1) (2) (3) (4) e. (1) (2) f. (1) (2) g. 3.

Description

assist top management on acct’g inform mgmt on new developments advise management: on accounting matters on managerial problems on tax matters defend management against: stockholders Internal Revenue Service public at large creditors insure that company employees: adhere to company policies do not steal from their company insure that management is accurate in: financial reporting income tax reporting act as society’s ‘watchdog” Accounting as a profession

ROLE DISCREPANCIES

87

TABLE 3. (Cont.)

4.

5.

Mean?

Description

Question

Respondent’s perception of audit function: valuable-worthless beneficial-harmful useful-useless desirable-undesirable justified-unjustified pleasant-unpleasant good-bad Average rank of the concept

184 184 184 184 184 184

3.28 1.62 3.31 1.93 1.83 3.72

156 180 146 167 173 116

SD

255.00*

@f= 5)

Auditor is responsible to: a. b. c. d. e. f.

the the the the top the

R

respondent company creditors stockholders management public at large

4.10 1.70 3.22 1.67 1.83 3.41

H value of difference in rankings 8.

2.13 3.15 3.69 2.48 2.08 2.32 2.64

R

respondent company creditors stockholders management public at large H value of difference in rankings

7.

184 184 184 184 184 184 184

Audit is useful to: the t. the C. the d. the top ;: the

295.62*

103 166 124 164 173 114

(df = 5)

The auditor reminds me of: a. b. c. d. e. f.

R

teacher assistant consultant lawyer policeman judge

3.55 2.96 1.59 2.92 2.99 2.58

H value of difference in rankings Legend : * Significant at .OOl level. 7 L-Likert, SD-Semantic

Differential,

Type of questiont SD

1.68 1.70 1.79 I.87 1.86 3.11 2.00 2.00

Company attitude concerning the audit: useful-useless pleasant-unpleasant excessive-inadequate desirable-undesirable necessary-unnecessary valid-invalid Average rank of the concept

6.

Number of observations

157.21*

115 125 168 111 112 124

@f = 5)

R-Ranking.

7 For the Likert (L) scales (questions 2 and 3), a low mean indicates high agreement and a high mean indicates disagreement. For the semantic differential (SD) scales (questions 4 and 5), a low mean is a favorable response while a high mean is an unfavorable response. For the ranked (R) items (questions 6, 7 and 8) a low mean indicates a high rank (most importance).

88

KIRKLAND A. WILCOX and CHARLES H. SMITH

second. It is interesting to note that the third lowest mean was “insure that employees adhere to company policies”. Generally, independent auditors do not see this as a major function. They choose rather to leave this role to management or internal auditors. This impression might be left with the employee, however, as a result of internal control examinations conducted by auditors in the course of an examination. Overall, the respondents disagreed with the function of “advising on managerial problems” and all of the “defense” functions. As noted earlier, CPAs generally feel that they can provide management advisory services and quite often defend or represent their clients in tax matters before the taxing agency in the USA-the Internal Revenue Service. The respondents also indicated disagreement with the suggestion that the auditor acts as society’s “watchdog”, although the disagreement was not as strong as with some other functions. In general, this agrees with the earlier discussion on the so-called “typical” auditor. In response to Question 3, the respondents agreed with the statement that public accounting is a “profession”. In light of the comparison made in the question (see Appendix) to the practice of law and medicine, there appears to be congruence between the CPA’s perception as to the general nature of his function in society, and the perception of client employees. The purpose of Question 4 was to survey more specifically the subjects’ views of the audit function by indications on semantic differential scales. Table 3 shows that the means are all on the favorable side of the scale. The pleusantunpZeasant scale, however, was only slightly favorable. It will be recalled that the results of the factor analysis of the scales for Question 4 indicated that the pleasant-unpzeasant scale did not load on the same factor as the other scales, and that the first factor was described “evaluativeworth” and the second “evaluative-aesthetic”. From this information then it can be concluded that the respondents view the worth of the audit as quite favorable, but that most do not really find the audit all that pleasant. Question 5 examined the respondents’ ideas concerning the prevailing attitude in each toward the audit. It was noted earlier that these scales revealed three factors, an aesthetic judgment (pleasant-unpleasant), an adequacy judgment (excessive-inadequate), and a value measurement (all remaining scales). The analysis of the responses

indicates that the value of the audit is quite high (all value scales have means that are less than 3.00) while the pleasantness is very slight (mean of 3.15). The adequacy judgment is very close to indifferent (a score of 4.00). Questions 6, 7, and 8 asked the respondent to indicate his ideas as to whom an audit is more useful (6) to whom the auditor is responsible (7) and as to the image of the auditor (8). The results of 6 indicate that the respondents view the audit as most useful to the company, top management, and the stockholders. The next three items were ranked substantially lower than the first three with the respondent, creditors, and the public at large in that order. This is somewhat different from the general views of the accounting profession. It is usually felt that the audit or the product of the audit is most useful to third parties-investors, creditors, and the public. It is probably not inappropriate to suggest that a perception of usefulness to the company and top management should reduce the probabilities for a conflictory situation. This conclusion is based on the idea that the client employee should be more cooperative if he can see some usefulness to his company rather than only to outsiders. It is also interesting to note that the respondents ranked themselves higher than either creditors or the public. It is usually assumed that the employee does not see much personal benefit from an audit. For this reason, the suggestion may again be made that such an employee perception should make for a reasonably healthy relationship between auditor and client employees. The rankings of the same groups for Question 7 (auditor’s responsibility) are the same as for 6 except that the stockholders moved from third to first and the respondent moved to sixth instead of fourth. This ordering is probably more in line with the profession’s views. From the responses to Question 8, it is seen that the auditor is considered most like a “consultant” with “judge” ranking second. The next three items were all ranked very closely and included “lawyer”, “assistant”, and “policeman” in that order. “Teacher” was ranked last. While a CPA does perform consulting services (on a management consulting job and an audit), he undoubtedly sees himself more as a judge than a consultant, i.e. especially on an audit. Certainly this consultant perception, to the extent that consultant implies usefulness, is in line with the favorable viewing of the audit function coming out

89

ROLE DISCREPANCIES

of Question 4. The rankings resulting from 8 are substantially different from the results of the Churchill-Cooper study of internal auditors as noted earlier. In that study, 57% of the respondents answered “none” and 40% responded with “little” when asked to indicate the extent to which internal auditors were seen useful as consultants. Also, 58% indicated that internal auditors were most like a policeman. Comparison of “conflict” and “no conjlict” groups Question 1 was asked in an attempt to determine perceptions as to the existence of conflict between employee or company and the auditors, and in order to compare the responses to Questions 2-8 of those who do perceive the existence of conflict and those who do not. It was felt that if participants could be divided into conflict and no conflict groups, and if responses to Questions 2-8 are different for these two groups (with the conflict group showing greater role perception differences), a basis would have been provided for suggesting that differences between employees and the auditor as to role perception could be responsible for the conflict. It could, of course, be argued that Question 1 is not a sufficient means for determining the existence of conflict, and that evidence as to more specific manifestations of conflict should be provided before concluding the existence of conflict. Pondy describes conflict as a process made up of five stages-latent, perceived, felt, manifest and aftermath. Pondy further indicates that every conflict episode does not necessarily go through every stage to open aggression. A potential conflict may never be perceived by the parties, or, if perceived, may be resolved before hostilities break out (Pondy, 1967, p. 299). Given these views of Pondy, and given the need to “manage” conflict (eliminate or reduce) prior to the breaking of hostilities, it is clear that perceptions of existence is a most important stage in the overall conflict process. Strong argument can, therefore, be made as to the adequacy of a question such as Question 1. Table 4 presents the results of the responses to Question 1. Participants responded on a sevenpoint scale. Scores of 1 - 3 and 5- 7 indicate agreement and disagreement, respectively. Responses in the middle space (score of 4) were evaluated as being indifferent. On the basis of this analysis, three groups were developed i.e. conflict (C), no

TABLE 4. Response to Question 1 (perception of conflict) Response Scored the scale l-3 (conflict) 4 (indifferent) Scored the scale Scored the scale 5-7 (no conflict) Mean for all respondents

No. 31 30 125 5.52

conflict (NC), and indifferent (I). The mean for all respondents was 5.52. Since a mean of 4.00 would indicate indifference, the conclusion here is that the majority of respondents did not feel that conflict has existed or currently exists in their particular relationship. However, it should be noted that 31 of the 186 respondents (16.67%) did indicate some degree of conflict while 30 more were indifferent. This means that more than 32% of the subjects did not indicate that their relationship with the auditor was or had been free of conflict. Table 5 presents the means of each of the to Questions 2-8. As to groups’ responses Question 2, there is very little change from the overall response results as set out in Table 3. The means are in basically the same order for each of the groups, and there is only a slight change in the pattern of agreement or disagreement as established in the earlier analysis. The two areas in which significant differences between groups exist are in the functions of reporting accuracy (2f) and defense of management (2d). The C group was in less agreement with the reporting accuracy of statements than was the NC group. This is indicated by the negative T values. Also, the C group disagreed less with the defense statements and the “watchdog” role than did the NC group. This conclusion is supported by positive T values. This would indicate that the views of the no conflict group are more in accord with the profession’s ideas than are those of the conflict group. From a statistical point of view there is a slight difference between the groups on Question 2. This might permit the suggestion that the role perception differences of the conflict group are responsible for the perceived existence of conflict. The purpose of Question 3 was to determine the respondents’ views as to the status of public accounting as a profession. As indicated by the Committee on Scope and Structure, one of the elements in retention of professional status is a

90

KIRKLAND A. WILCOX and CHARLES H. SMITH TABLE 5. Views concerning the role of the auditor - grouping based on answers to Question 1 (perception of conflict) Group means Question 2.

Description

C

I

NC

H value

Kendall 7

3.84 3.71

3.43 3.73

3.52 4.11

.77 1.75

-.073E .034

2.90 4.65 3.32

3.20 4.10 2.83

3.06 4.62 3.42

.42 2.24 1.33

-.031 .002 .ooo

5.29 4.58 5.06 4.81

4.57 4.07 4.30 4.13

5.49 4.70 5.19 5.31

8.27C 2.66 6.1lD 11.58B

3.00 3.48

2.93 2.90

3.10 3.62

.lO 2.70

.015 .015

2.26 2.94 4.39

2.17 2.33 3.67

1.88 2.38 4.81

4.24F 4.56F 9.19c

-.179A -.145B .201A

Auditor’s function is to: assist top management on acct’g inform mgmt. on new developments advise management : on accounting matters on managerial problems on tax matters defend management against: stockholders Internal Revenue Service public at large creditors insure that company employees: adhere to company policies do not steal from their company insure that mgmt is accurate in: financial reporting income tax reporting act as society’s “watchdog”

:: C. (1) (2)

(3) d. (1) (2) (3) (4) e. (1) (2) f. (1) (2) g.

.114c .054F .108C .169A

3.

Accounting as a profession

2.10

2.73

1.96

6.33D

-.196A

4.

Respondent’s perception of audit function: valuable-worthless beneficial-harmful useful-useless desirable-undesirable justified-unjustified pleasant-unpleasant good-bad Average rank of each group

2.06 1.97 2.00 2.16 1.97 3.10 2.26 2.22

1.70 1.80 1.77 1.87 2.07 3.80 2.30 2.19

1.58 1.60 1.74 1.80 1.79 2.94 1.86 1.90

6.10D 4.41F 3.04 5.27E 2.60 12.04B 7.28D 15.lOA

-.190A -.201A -.154A -.178A -.153B -.169A -.221A

2.48 3.52 4.00 2.94 2.23 2.65 2.97

2.50 3.63 3.73 2.87 2.43 3.00 3.03

1.95 2.94 3.59 2.27 1.95 2.07 2.46

8.97C

10.07B 5.15E 16.49A 6.24D 15.87A

-.162A -.192A -.112B -.189A -.128B -.190A

13.22B

@f= 2)

5.

Company attitude concerning the audit: useful-useless pleasant-unpleasant excessive-inadequate desirable-undesirable necessary-unnecessary valid-invalid Average rank of each group

6.

(df = 2)

Audit is useful to: a. b. c. d. e. f.

the the the the top the

respondent company creditors stockholders management public at large

H value of differences in rankings Kendall W

6 6 4 3.26F 3 1 1 5.58E 4 4 5 2.17 1 3 3 2.05 2 2 2 1.45 5 5 6 1.83 43.27A 30.29A 196.1OA (df,=5) .822B

-.167B -.166A .024 -.008 -.064F .055F

@fc=2)

91

ROLE DISCREPANCIES TABLE 5. (Cont.) Group means

7.

I

NC

Hvalue

Kendall 7

Auditor is responsible to: a. b. c. d. e. f.

the the the the top the

respondent company creditors stockholders management public at large

H value of differences in rankings Kendall W

8.

C

Description

Question

6 6 6 2 3 1 4 5 4 1 2 2 3 1 3 5 4 5 53.95A 43.12A 209.37A

.84 8.28C .07 2.17 5.03F 4.02F

-.166B -.189A -.018 .059F -.094D -.022

(d&=5)

(dfc=2)

1.86 1.49 4.27F 2.13 4.56F .92

-.149B -.072F -.130B .057F .003 -.084E

(df,=5)

(df$)

.873B

The auditor reminds me of: 5 3 1 2 4 3

a. teacher b. assistant consultant ;. lawyer policeman ;: judge H value of differences in rankings Kendall W

6 5 1 4 2 3

6 3 1 4 :

26.65A 20.08B 121.5OA .662D

Legend: A-significant B-significant C-significant

at .OOl level at .Ol level at .02 level

to respond to public needs (AICPA, 1975, p. 1). Since this response to public needs corresponds to the role the CPA plays, the authors were interested in determining (1) the extent to which the respondents view public accounting as a profession, and (2) the difference in views of those indicating conflict versus those who did not. As shown in Table 5, all respondents do see public accounting as a “profession”, but the C group was in less agreement than the NC group. The analysis of the three groups’ responses to Questions 4 and 5 indicates that the C group was less favorable on all scales than the NC group. The r values are all significant at either the .OOl or .Ol level and in the negative direction, meaning that as the response on Question 1 decreases (stronger agreement that conflict exists), the response on the 4 and 5 scales increases (less favorable). As to the ranking questions 6, 7, and 8, the Kendall W coefficients are all significant at least at the .05 level. This means that the correlation of the ranking by the three groups is high. Although it cannot be concluded that there are significant differences in the rankings of the three groups,

willingness

D-significant E-significant F-significant

at .05 level at .lO level at .20 level

some patterns may be noted. For example, the C group seemed not to feel that the audit is as useful to themselves or their company as did the NC and I groups. This is indicated by the fact that the NC group ranked the “company” first and “stockholders” third, while the C group did just the

opposite. Also, the NC group ranked themselves fourth as opposed to sixth by the C group. This pattern carried over to the auditor’s responsibility (7) although not with the same amount of emphasis. The NC group ranked the “company” first and the “stockholders” second. The C group’s rankings were just the reverse. There is some indication then that the conjlict group senses the usefulness of the audit and the auditor’s responsibility to be directed more to outsiders or third parties than does the no conjlict group. The results of Question 7 (on the image of the auditor) suggest only one possibly interesting finding-the C group ranked “policeman” slightly higher than did the NC group. Possible indicators of role conjlict In addition to studying the

responses

(to

92

KIRKLAND

A. WILCOX

Questions 2-8) of participants on the basis of a comparison of conflict and no conflict groups, an analysis was made of the responses in relation to employee and company (client) background information. The hope was to identify relationships that might be viewed as reasonably reliable indications of conflict resulting from role perception differences. Such information could be helpful to those interested in and/or responsible for the “management” of conflict in the auditor-client system. Through the questionnaire, client employee background information was collected as to age, education, job function and title and time in current function. In addition, of course, information was automatically available as to the size of each of the client companies (defined with reference to the number of client employees having contact with the auditor during an audit)6-see Table 1. For this part of the study only the significant findings are presented-see Tables 6 and 7. Table 6 presents an analysis on the basis of company affiliation for the functions (listed in Question 2) for which there are significant differences between companies, and whose r coefficients are significant. A negative r value means that as the size of the company declines, the agreement with the function increases. For example, Question 2b (informing management on new developments in accounting) had a T of -.195 (.OOl significance). The means ranged from 4.21 for Company A (the largest) to 2.36 for Company E (the smallest). This indicates that the respondents from the smaller companies view this as a function while those from the larger companies do not. This same pattern was observed for 2c(2) (advise on managerial problems), 2c(3) (advise on tax matters), and 2e(2) (insure that employees do not steal). It is of interest to note that for 2e(l) TABLE

6. Analysis

of certain

auditor

and CHARLES

H. SMITH

(insure that employees adhere to company policies) the pattern is the reverse. One explanation for this might be that for larger firms the internal control analysis is usually undertaken in great detail and involves discussion with a number of people. In smaller companies this analysis is often in abbreviated form because of the small number of employees in the company. In these companies the internal control analysis quite often involves only one or two top people. From Table 6 one notes then that, with the exception of e(2) for Company E and e(1) for all companies there is a tendency for less perception difference (employee vs auditor) as the company gets smaller. It is possible that small clients obtain a wider range of services from their CPAs. The reason for this is that large firms usually have their own specialty staffs to take care of such things as taxes, management problems, etc. The smaller companies usually do not find it economical to retain such specialists on a full time basis and would rather obtain advice from outside sources as specific problems arise. It would seem reasonable to expect then, that the employee of a small firm would perceive a wider variety of functions than would those of a large firm who only see the CPA during the annual audit. If, therefore, role perception differences are responsible for conflict (as suggested in the analysis of the previous section), the analysis of Table 6 suggests that company size is an appropriate indicator of potential conflict. It is possible, of course, that company characteristics other than “number of employees involved in the audit” could be responsible for role perception differences. However, because interorganizational studies have shown that the boundary personnel of interacting organizations are primarily responsible for establishing the mood of that interaction (see Evan, 1969, p. 74; also Gill functions

(Question

Company Question

Description Auditor’s

2. b. c (21 c (3) e (1) e (2)

function

means

A

B

C

D

E

H Value

Kendall 7

4.21 4.77 3.61 2.63 3.61

3.50 3.81 2.55 3.32 3.64

3.37 3.75 2.38 3.75 3.00

3.83 2.67 2.50 5.17 2.83

2.36 4.64 2.09 5.73 2.55

12.54C 13.39B 15.41B 27.75A 4.10

-.195A -.176A -.243A .325A -.084D

is to:

inform mgmt on new developments advise on managerial problems advise on tax matters insure adherence to policies insure no theft by employees

6The size ranking of the participating assets, number of employees, etc.

2) by company

companies

would

be the same for a number

of criteria,

i.e. total

sales, total

93

ROLE DISCREPANCIES

TABLE

7. Analysis

of certain

auditor

functions

(Question

2) by educational

Group Question 2.

Description Auditor’s

b. c (1) c (3) e (1)

e (2) g.

function

means

degrees

BBA

BA

MBA

MS

Other

H Value

Kendall 7

4.43 3.13 3.40 2.93 3.75 4.60

3.75 3.06 3.50 3.75 2.94 3.50

5.25 3.25 3.25 4.25 4.50 3.00

2.00 2.33 2.67 2.00 7.00 5.33

2.17 1.50 1.33 2.33 2.67 3.00

15.92B 7.92E 10.74D 6.72F 10.91D 9.91D

-.252A -.152C -.159C .034 -.028 -.210B

is to:

inform mgmt. on new developments advise on accounting matters advise on tax matters

insure adherence to policies insure no theft by employees act as society’s “watchdog”

Legend: A-significant at .OOl level B-significant at .Ol level C-significant at .02 level & Stern, 1969, p. 26) it seems reasonable to assume that the size of the company as measured by number of boundary personnel is the most appropriate criterion. Furthermore, while the number of participants in some of the companies was low, reference to companies A, B and E (greatest participation in terms of aggregate number of employees and response rate), supports the observations of the previous paragraph. Another background variable that provides some insight into the role perception problem, is the educational degree held by the respondent. Table 7 presents the results of this analysis. Although the pattern is not as distinct as the analysis by company, some general impressions are obtained. For example, on most scales with significant differences between groups, the MBAs have the highest or second highest mean, thereby indicating less agreement with the statement concerning the function. BBAs are generally second. This is not what one would expect. It seems logical to assume that BBAs and MBAs, having a business education with courses in accounting, would view more of these various items as functions of CPAs than those with degrees in fields other than business. Some of the results appear to suggest that a minimum exposure to accounting at the university level (which is the case with many BBAs and MBAs) could change/distort a previous perception based on no exposure to accounting at the university level (which is the case with most BAs and MSs). Note the relatively lower means of the BAs and MSs on a number of issues. Other background variables that might appear to have a possible effect on a respondent’s

D-significant E-significant F-significant

at .OS level at .lO level at .20 level

perception of the CPA’s role are education and years in current function. These and other background variables were examined but did not reveal any significant results. Although the groupings under the education variable were significantly different on several scales, no particular patterns could be distinguished. LIMITATIONS There are three possible limitations to this study. First, the grouping of respondents was based upon their perceptions of conflict rather than any observation of actual conflict by the authors. There is no way to know whether or not these perceptions might manifest themselves in a manner that would be detrimental to the effective and efficient completion of the audit. However, Pondy (1967, p. 299) has identified five stages through which a conflict episode might pass, and draws attention to the importance of the perceived conflict stage. If there are perceptions of conflict on the part of client personnel, there is every reason to believe that these perceptions would probably result in some discomfort to the auditor. A second possible limitation has to do with the fact that only client personnel were studied. Although the responses of client personnel were compared to official and other publications that deal with the role of the auditor, it is not known how these perceptions would compare with the views of the practicing auditor. It is presumed, of course, that the auditor’s views would be similar to those elaborated in official and other literature. It might also be argued that, the fact that the respondent firms were not selected at random, also

94

KIRKLAND

A. WILCOX

points to a possible limitation. Although variations in size, environment, and industry were accomplished, the researchers deemed it appropriate to select those firms that were willing to allow a study of this nature to be administered to their employees. It is quite possible, of course, that firms that are willing to participate are the very firms that have not experienced significant conflict with their auditors in the past and, therefore, are more cooperative by nature. This may understate the amount of conflict that would be found in a random sample of firms.

SUMMARY AND CONCLUSIONS Generally the respondents’ overall views of the auditor’s functions agree with those of the public accounting profession. Some differences were noted in the views as to the usefulness to various groups. The respondents ranked the company and top management higher than the third parties, i.e. stockholders and creditors. The respondents generally saw the auditor as a “consultant” or “judge” which was different from other studies whose subjects saw the internal auditor as a “policeman”. Analysis on the basis of conflict/no conflict groups saw the conj7ict group generally viewing the function of defending the company against various outside groups more as a role for CPAs than did other groups. Also, the conjlict group was less favorable in its views of the worth and pleasantness of the audit as indicated by the semantic differential scales. One of the more significant results was the fact that the conflict group did not see the audit as useful to themselves or to their companies as they did to outside parties. The no conjlict group had the opposite view. Also the conji’ict group ranked “policeman”

and CHARLES

H. SMITH

slightly higher than did the no conflict group. Analysis of other background variables permitted only one significant observation. The respondents from smaller companies appeared to see the auditor filling a wider variety of roles than did respondents from the larger firms. Despite the limitations cited, the authors believe that, at a minimum, the study points to a need for the auditing profession and audit firms to try to educate their clients as to their specific role in society. This might contribute to avoidance of conflictory situations. Business firms might also undertake educational programs in this area for their personnel in an attempt to facilitate completion of the audit task as much as possible. Inefficiency from whatever source in an audit, can be costly to both the auditor and his client. Role dissatisfaction or discrepancies is only one possible source of conflict. Future research should attempt to identify other potential sources. Walton and Dutton, in their studies of interdepartmental conflict, and Stern et al., in their studies of distribution channels (cited earlier), have established many other potential sources of conflict. Future research should also include investigations of the auditor’s perceptions of conflict and possible sources of conflict. Such an investigation might provide insights as to similarities and significant differences between the perceptions of client personnel and the auditor. A third and more comprehensive area of investigation would be an in-depth study of actual audit situations in which conflict does in fact exist. This type of research has been done in management and other sociological studies and has been shown to be most beneficial in the management of conflictory situations. Hopefully, this study will help to establish a framework from which this sort of future research can emanate.

BIBLIOGRAPHY American Institute of Certified Public Accountants, A Description of the Professional Practice of Certified Public Accountants, Code of Professional Ethics (1967). American Institute of Certified Public Accountants, Committee on Auditing Procedure, Statement on Auditing Standards, No. I (1973). American Institute of Certified Public Accountants, Committee on Scope and Structure, Report of the Committee on Scope and Structure (Discussion Draft), published in the Journal of Accountancy (January, 1975). Arthur Andersen & Co., Public Accounting in Transition (a survey by Opinion Research Corporation for Arthur Andersen & Co.), (Arthur Andersen & Co., 1974). Bevis, Herman W., The CPA’s Attest Function in Modern Society, Journal of Accountancy (February, 1962), pp. 28-35.

95

ROLE DISCREPANCIES Churchill, Neil C. & Cooper, William W., A Field Study of Internal Auditing, The Accounting Review (October, 1965), pp. 767-781. Evan, William M., Toward a Theory of Inter-Organizational Relations, in Distribution Channels: Behavioral Dimensions, L. Stern, ed., (Houghton-Mifflin, 1969), pp. 73-87. Fink, Clinton F., Some Conceptual Difficulties in the Theory of Social Conflict, Journal of Conflict Resolution (December, 1968), pp. 412-460. Gill, Lynn, E. & Stern, Louis W., Roles and Role Theory in Distribution Channel Systems, in Distribution Channels: BehavioralDimensions, L. Stern, ed., (Houghton-Mifflin, 1969), pp. 22-47. Hill, Thomas H., Jr., Accountants’ Legal Liability, in Readings in Auditing, J. Johnson and J. Brasseaux, eds., 2nd ed. (South-Western, 1965), pp. 232-245. Levy, Saul, Accountants’Legal Responsibility, (AICPA, 1954). Nie, N. H., Bent, D. H. & Hull, C. H., Statistical Package for the Social Sciences User’s Manual (McGraw-Hill, 1970). Osgood, C. E., Suci, C. J. & Tannenbaum, P. H., The Measurement of Meaning (University of Illinois Press, 1971). Pondy, Louis, R., Organizational Conflict: Concepts and Models. Administrative Science Quarterly (September, 1967), pp. 296-320. Rummel, R. J., Understanding Factor Analysis, The Journal of Conflict Resolution (December, 1967), pp. 444-480. Siegel, S., Nonparametric Statistics for the So&l Sciences (New York: McGraw Hill, 1956). Stern, Louis W., Distribution Channels: BehavioralDimensions (Houghton-Mifflin, 1969). Stern, Louis W. & Heskett, J. L., Conflict Management in Interorganizational Relations: A Conceptual Framework, in Distribution Channels: Behavioral Dimensions, L. Stern, ed., (Houghton-Mifflin, 1969), pp. 288-305. Walton, Richard E. & Dutton, John M., The Management of Interdepartmental Conflict: A Model and Review, Administrative Science Quarterly (March, 1969), pp. 73-84. Willingham, J. J. & Carmichael, D. R., Auditing Concepts and Methods (New York: McGraw-Hill, 1971).

APPENDIX QUESTIONNAIRE* Type of scalet

GENERAL EXISTENCE OF PERCEIVED CONFLICT 1.

As far as I know, there is now or there has been some conflict between me or my company and the auditors. Strongly agree

1:2:3:4:5:6:7

Strongly disagree

L

AUDITOR’S FUNCTION 2.

Based upon my observations, the independent

auditor’s function has been to:

a. assist top management with accounting matters. Strongly disagree : : : :

:

:

Strongly agree

b. inform top management about new developments in accounting. Strongly agree : : : Strongly disagree

L L

c. advise top management: (1) on accounting matters. Strongly agree

:

:

:

:

:

:

:

:

:

.

:

:

:

:

Strongly disagree

L

:

Strongly agree

L

.

Strongly disagree

L

(2) on managerial problems.

Strongly disagree (3) on tax matters. Strongly agree

96

KIRKLAND A. WILCOX and CHARLES A. SMITH d. defend top management against: (1) the stockholders. Strongly disagree :

:

:

:

:

:

Strongly agree

(2) the Internal Revenue Service. Strongly disagree :

:

:

:

:

:

Strongly agree

(3) the public at large. Strongly agree

:

:

:

.

.

Strongly disagree

:

:

:

:

:

:

Strongly disagree

:

:

.

:

:

Strongly disagree

:

:

:

:

:

Strongly agree

(4) the creditors. Strongly agree e.

insure that the company’s employees: (1) adhere to company policies. Strongly agree

:

(2) do not steal from their company.

:

Strongly disagree

f. insure that top management is accurate in its: (1) financial reporting. Strongly disagree

:

:

:

:

:

:

Strongly agree

(2) income tax reporting. Strongly agree

.

:

:

:

:

:

Strongly disagree

:

:

:

:

:

:

Strongly agree

g. act as the public’s “watchdog”. Strongly disagree

3.

In the sense that the practice of law and medicine are generally held to be professions, the practice of public accounting by CPAs is also a profession. L Strongly disagree : : : : : : Strongly agree

4.

In my perception, the audit function is: valuable

SD?

.

harmful

: : . : .

useful desirable justified unpleasant bad

5.

: : : : :

: : : : :

: : : : : : :

: : : : : :

: . : : : :

worthless beneficial useless undesirable unjustified pleasant good

SD?

The prevailing attitude in my company is that the audit is: unpleasant

- : _:

inadequate desirable

_: _:

necessary invalid

-

useful

-

: :

: : : : : :

: : : : : :

: : : : : :

. : : : : :

. : : : . .

useless pleasant excessive undesirable unnecessary valid

In this section you will be asked to rank various responses to a number of questions. In ranking the responses, you should give a 1 to the best response, a 2 to the next best, a 3 to the third best response and so on. If you feel that one or more of the responses do not apply, give them a 0. If you feel that two or more of the responses are equal, give them the same ranking.

97

ROLE DISCREPANCIES BE SURE THAT YOU GIVE EACH RESPONSE TO EACH QUESTION A RANKING OR A O! The audit is useful to: (rank using the scale given above). d. _

a. _me b.c. The independent

the company the creditors auditor is responsible to:

e. f. _

R the stockholders top management the public at large

(rank)

d. _

b.-

the company

e. -

the stockholders top management

c. -

the creditors

f. _

the public at large

d. _ e. _ f. -

policeman

a.

-me

The independent a. b .c. -

auditor reminds me of: (rank) teacher assistant consultant

lawyer judge

*The headings indicated hereunder were not included in the actual questionnaire. here in order to facilitate discussion.

They are provided

t Scoring of scales was as follows: All Likert (L) scales were scored with a 1 rating for Strongly Agree and a 7 rating for Strongly Disagree (see Question 1). All semantic differential scales (SD) were scored with a 1 rating for the most favorable response and a 7 for the least favorable. Ranking items (R) were scored as indicated in the questionnaire above. f Instructions 82-83).

for these questions

(SD) were given as recommended

by Osgood,

et al.,

(1971, pp.